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“Get out of their way….”

“Good executives confuse themselves when they convince themselves that they DO things…Set a vision, listen to the team,  and then get out of the way.” Marissa Mayer, CEO, Yahoo.

While there are many hidden assumptions underpinning this simple statement, it still serves as a strong reminder for those of us tempted to micro-manage.
Iain

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Australia leads NZ 2 – 0

The Australian Government looks likely to change its GST treatment of digital currencies. In NZ we’re left wondering what our Government’s position is.

This is the second time in about as many weeks Australia has taken steps to address a well acknowledged GST issue. Just a few days ago we learnt it is now almost inevitable the low value import threshold in Australia will be reduced, perhaps even eliminated; see my 22 July post.

And on 4 August the Senate Standing Committee on Economics released its report on digital currencies. You can find the full report here: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Digital_currency/Report

The Committee was asked to consider the tax treatment of digital currencies and the Australian Tax Office’s (ATO) published position.

The report highlights the practical and commercial issues with the current tax treatment. GST is singled out as the most significant. The ATO, rightly in my view, concluded digital currencies are commodities and GST applies to them in the same way it applies to traditional barter arrangements.

As the Committee points out, this leads to double taxation and can be a permanent cost for private consumers when they’re exchanging real currency for digital currency.

The Committee recommends digital currency (like Bitcoin) be treated the same as money for GST purposes and the Government consult with States to consider changing the GST law. This would remove GST from digital currency and resembles the “exempt” treatment adopted in the UK.

I have no doubt the NZ Government (through Inland Revenue) is following this development just as it is the low value import threshold issue. And, there is sense in staying close to Australia and not blazing our own path on these issues. Nevertheless, it would be good to know where IRD stands on digital currencies and GST.

Iain

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Govt raises stakes for online shoppers

The NZ Prime Minister says his government will go it alone if the OECD doesn’t move quickly enough to impose GST or VAT on online sales.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11418586

The fact the Prime Minister is raising this now is significant. The OECD is working on a multilateral solution for governments losing tax revenue from digital commerce. The next reporting deadline is towards the end of 2015. The question is, will Mr Key wait that long? He doesn’t say.

Other countries have already moved on this. The EC requires certain overseas companies to register and collect VAT on products sold to consumers in the EC. South Africa has done the same and there are others.

The likely multilateral solution will focus on enforcement in my view. Legislating to require non-resident companies to register for GST here is an important first step and most companies will comply. However, many may not and the Government will need a mechanism to enforce the law. That’s where an OECD wide solution could be helpful.

Prime Minister Key is suggesting some mechanism to block digital retailers from access to OECD consumers if they do not comply with the VAT/ GST law.

Clearly this issue is now well and truly in the Government’s spotlight. NZ retailers have been pushing for something to be done for some time now and will be watching developments closely.

Cheers

Iain

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Charges for failing to turn up to parties

A parent in the UK invoiced the parents of a five year old GBP15.95 because their son failed to turn up to a birthday party after they had accepted the invitation on his behalf.

See the story here: http://www.bbc.com/news/uk-england-cornwall-30876360

They’re threatening to sue to recover the money!

So what are the VAT implications here, even if the claimant has only a snowball’s chance of recovering the money?

VAT probably wouldn’t apply because it’s likely to be viewed as a “compensatory” payment rather than consideration for goods or services.

Also, the claimant probably isn’t registered for VAT in relation to the birthday party activity.

However, if the claimant were a professional birthday party organiser VAT might apply. It would have to be established there were legal relations intended between the organiser and the invitee and a term of that contract was that the invitee, having accepted the invitation, would pay a fee if they failed to show up.

So, there was a contract, the customer failed to honour their side of it and a fee is charged. In New Zealand that fee might be subject to GST if the fee effectively is an adjustment to the originally agreed price. However, if it’s to “compensate” the organiser for a loss suffered because of the no-show then GST probably wouldn’t apply.

The IRD recently stated their view on the GST treatment of late hire charges and certain fines:http://www.ird.govt.nz/resources/1/5/1552acab-6838-4617-817d-86bfe0ab86b4/qb1414.pdf

The statement illustrates some of the same principles.

These things get complicated when you scratch beneath the surface don’t they?

cheers

Iain

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Governments using lotteries to collect tax

Tax collectors in the EU are looking more closely at the use of lotteries to tackle VAT evasion.

This paper, just published, discusses how existing lottery schemes work and reveals there could be upside for governments. It concludes more empirical evidence is needed to confirm the benefits of tax lotteries but they may be a useful weapon in the fight against VAT (GST) evasion. http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_51.pdf

They might also be a useful tool for governments looking to reverse the revenue lost as a result of increased online shopping.

The challenges for governments from the growing digital economy have been widely discussed. The OECD is consulting on a possible multilateral solution, http://www.oecd.org/ctp/consumption/discussion-draft-oecd-international-vat-gst-guidelines.pdf. I wouldn’t be surprised if tax lotteries are considered as a tool to encourage compliance with laws requiring non-residents to register for VAT in countries where they are selling online products to consumers.

The paper on tax lotteries is the product of a recent workshop attended by 39 EU member states. They discussed lottery schemes already running in Malta, Slovakia, Portugal and Georgia. They also heard from experts in Greece looking at a scheme there.

Tax lotteries have been around for a while. Taiwan has used them since the 1950’s and there was some evidence they experienced up to 20% improved compliance as a result.

They’ve been used to encourage consumers to ask for receipts when buying goods and services. The receipts are then sent to a central agency (by post, text or email) or some other electronic system is used so the receipts become entries in a lottery. There are then regular draws and cash prizes. In Malta for example the draws take place each month and are done manually i.e. the receipts are sent to the central lottery agency and put into a large barrel from which the draws are made.

The idea is consumers are incentivized to ask for receipts and this discourages evasion by creating a paper trail which the tax authorities can use to monitor compliance.

Some data collected so far suggests these lotteries do have an initial impact on compliance with increased revenues for the government. However, it seems over time the benefits fade. The EU workshop found that the main difference occurred as a sharp increase in reported sales by very small retailers but little difference in the reported sales of large retailers. One study reported increased tax revenues of Euro 8m against administrative costs of Euro 1.6m.

There have been some interesting reactions, including the emergence of “professional players” in these lotteries, being people who devote a large amount of time to them and who have even been found to be submitting receipts into the lottery for expenses they did not themselves incur.

The EU is committing resources to better quantify the potential upside for states in running these sorts of lotteries.

Another overseas development for the NZ Inland Revenue Department to watch.

 

Cheers

 

Iain

 

 

 

 

 

 

 

 

 

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Australian Tax Office rules on Bitcoin

The ATO has just issued a ruling on the GST treatment of Bitcoin. Here: http://law.ato.gov.au/atolaw/view.htm?docid=%22GST%2FGSTR20143%2FNAT%2FATO%2F00001%22

In brief:

1. A transfer of bitcoin is a “supply” for GST purposes.
2. Bitcoin is not “money” under the GST legislation.
3. A supply of bitcoin is not a “financial supply”.
4. If bitcoin are supplied in exchange for goods or services the transfer will be treated as a barter.
5. A bitcoin is not a “voucher” for GST purposes.
6. A secondhand goods input credit is not available on the acquisition of bitcoin.

No real surprises there. This had been well signposted.

We await the NZ IRD view which I wouldn’t expect to be much different.

Iain

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Savings up + GST collections down = GST rate up?

Kiwi households are saving more than at any time since 1995 according to the latest national accounts.

http://www.beehive.govt.nz/release/household-savings-rate-positive-five-years

The flip side is with low inflation and lower consumption the Government’s GST take is down.

I’m not an economist but my understanding is even though households may be saving more, national savings overall aren’t necessarily any better off because of the push/pull effect of private savings and tax collections.

This was something the Savings Working Group considered in their report Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity: Final Report to the Minister of Finance published in February 2011.

As a countermeasure the Savings Working Group recommended an increase in the GST rate from 15% to 17.5% over other tax changes because GST is “less distorting than income tax on the saving decision”.

http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/finalreport/30.htm

The political challenge with increasing GST to 17.5% is that our rate is already amongst the highest in the world when it comes to basic food, education, healthcare and utilities. Outside of the benefit system there doesn’t seem to be a simple mechanism to compensate low-income households for an increase in GST and this must surely put real pressure on our single rate broad-based regime.

Iain

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IRD comments on short term Christchurch rentals

Inland Revenue’s latest Business Tax Update reminds us people renting out houses in Christchurch short-term have to pay income tax on the rent, less deductions. It’s a pity they don’t mention GST because that’s more interesting.

The update is here: http://www.ird.govt.nz/aboutir/newsletters/business-tax-update/2014/btu-issue-057-11-14.html#06

An extract of the relevant section is quoted at the bottom of this post.

So, in a nutshell, if you own a house in Christchurch and someone rents it of you for, say, one month, fully furnished while their own home is repaired you have to declare the income from that and pay any income tax due. Not exactly a bombshell is it? Sure, a few people might genuinely be stunned by the revelation they have to pay income tax on income they receive from renting out their house, even for a short term. But my guess is for most people the Update might as well be telling them how to extract nutrient from eggs by suction.

The really interesting, and more contentious, point is how GST applies.

Providing residential accommodation in “dwellings” is not subject to GST. However, providing accommodation in “commercial dwellings” is subject to GST (assuming the registration threshold is satisfied).

A “dwelling” is a place the person occupies as their “principal place of residence” and excludes any “commercial dwelling”.

A “principal place of residence” is a place the person occupies as their “main residence for the period to which the agreement for the supply of accommodation relates”.

A “commercial dwelling” includes hotels, motels, boarding houses, hostels, B&B’s and similar premises.

If you rent a house out to someone for, say one month, fully furnished, while they have their own place repaired, are you providing anything more than accommodation that is similar to hotel or motel accommodation, i.e. short term furnished accommodation? Is the tenant occupying your place as their “main residence” during the rental period or is it secondary temporary accommodation while their “main residence” is repaired?

I think there is some doubt over how the GST Act applies in these situations. Sure, most will not be within the annual $60,000 GST registration threshold. However, some of the house owners may be registered for GST in their own right for other purposes, or may even wish to register for GST in relation to the temporary rental activity. Whether they should or can is unclear.

I’d like to see clarity on less obvious issues like these when the IRD is publishing notices telling taxpayers of their obligations.

Cheers

Iain

Extract from Business Tax Update November 2014

Renting out your own home short term

There’s a demand for temporary rental properties in Canterbury because of thousands of families needing accommodation while they wait for earthquake repairs on their homes. Some homeowners are meeting this need by offering furnished homes for short-term rental.

If you rent out your own home, even for a short time, any income you receive is liable for income tax, so you must include it in your tax return.

However, you can claim a deduction for any expenses you incur while your property is rented out. But you can only claim that proportion of ongoing costs for the time your property is rented out. For example, if you rent your home out for three months, you can claim the rates, insurance, interest and any agent’s fees you incurred during that period.

Find out more on what expenses you can claim”

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Taxing energy drinks unconstitutional

A recent decision in France has concluded a government tax on energy drinks contravenes the country’s constitution.

Under France’s tax laws a tax was imposed on energy drinks with at least 220 mg of caffeine per 1,000 ml.

The tax was challenged and the Constitutional Council was asked to rule.

The Council gave its decision on 19 September.

In its decision the Council indicates the goal of improving public health was the policy foundation for the tax and concludes it is acceptable, in pursuing that goal, to distinguish between drinks based on caffeine content.

However, in this case, some drinks which had higher caffeine levels than 220 mg per 1,000 ml were exempt from the tax because they weren’t “energy drinks”. This was a problem according to the Council because in effect drinks that were substantially the same in terms of caffeine content were not treated equally for tax purposes and this differential treatment was not justified.

Therefore, the Council ruled the tax is contrary to France’s Constitution.

The lesson for tax policy makers – it’s not what you do, it’s how you do it. The problem was created because caffeine was used as the determinant for imposing the tax. If a characteristic unique to “energy drinks” had been used instead then it’s possible a different outcome might have been reached.

Iain

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VAT and online sales

This is a very good item on the wider business implications of proposed changes in Europe to the VAT treatment of online digital media sales.

http://performance.ey.com/2014/02/20/vat-change-online-sales-just-tax-concern/

Cheers

Iain